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Guide to loans

Lots of lenders offer loans. There are a few things to look out for when comparing products that will help you work out the cost of each one and choose the right loan for you.

Loans are issued by banks and other financial companies. They allow you to borrow a certain amount of money, which you then pay back in instalments over an agreed period of time.

Interest rates

With a loan you'll pay back the original amount you borrow plus interest and charges. The APR is a standard way of showing the costs of borrowing, on an annual basis, so you can work out which option is right for you.

If the loan you choose has a fixed interest rate, the amount you pay each month will stay the same, unless you're told otherwise.

With a variable rate the monthly payments could go up or down - important to consider when budgeting.

Types of loan

Broadly speaking loans fall into two categories:

  • Unsecured loans, sometimes known as personal loans
  • Secured loans, sometimes known as homeowner loans

Unsecured or personal loans

These loans are available from a choice of lenders and are most commonly for between 1,000 and 25,000. They are not 'secured' against your home, and therefore may be suitable for a wider range of people and circumstances. These loans are available to those who meet the lender's criteria (a key criterion being a minimum age of at least 18).

The amount of interest you'll pay depends on the length of time you want to spread the repayments over and the amount you're borrowing. Sometimes it's also affected by your credit score or financial history.

RBS Personal loans

Secured loans

These are loans that are 'secured' against your home. They are only available to people who own or have a mortgage on their home and who have enough equity in the property to secure against the amount they want to borrow.

In taking a secured loan, you're agreeing your home can be used as security against the debt and could be taken as full or part repayment of the debt if you were unable to make the agreed payments. Put simply, if you miss payments and slip into arrears, your home could be repossessed.

Some lenders may give a better interest rate on a secured loan, especially if you're borrowing larger amounts. However, you should compare all types of loan from a range of lenders before taking one out. And think carefully about the risk of losing your home if you were unable to pay for any reason.

Student loans

Student loans are offered by the government to help students with the cost of higher education. These loans work differently to other loans. For more on student loans visit visit Directgov

Payday loans

Payday loans have become more available over recent years. Some people find them useful if they need to pay an unexpected bill. However, you should only ever consider taking out one of these loans if you're certain you can pay it back quickly.

Payday loans can be very expensive. If you're late in paying back the loan, further charges and interest will apply.

Make sure you are aware of all fees and charges, and understand what could happen if you miss payments.

If you're considering a payday loan you may want to read about dealing with financial difficulty.

RBS do not offer payday loans.

Things to consider

Look carefully at rates. If two loans have the same APR, but are repayable over different lengths of time, the total cost will be different. The APR includes the total interest and other charges, per year. So if one loan is to be paid back over a longer period of time, that loan will cost you more in interest.

Make sure you can afford the repayments. The APR covers the cost of the interest and charges, but make sure you know the actual amount you'll be repaying each month, and whether the rate is fixed or variable. If it's variable it could go up as well as down.

If repayments are higher than you can commit to, you could think about extending the length of time you take to repay the loan. This will give you lower monthly payments, but will probably cost you more overall as you'll be paying more interest.

Be aware of all the charges. There can be more to the cost of a loan than the interest. Check if there is a penalty if you choose to repay the loan early. Sometimes there's a hefty interest charge or admin fee on the last month's payment. And, if you're late paying, because a Direct Debit bounces, for example, you may be charged by the loan company and your bank. So make sure you know about all charges up front.

RBS Personal loans

Personal loans from RBS

Top tip

Think carefully about a loan

Read and understand the details before taking out a loan. Think about what could happen if you fall behind on payments.